In an effort to fill a budget shortfall that has now grown to $2.8 billion, the 2010 Washington State Legislature has proposed eliminating the sales and use tax exemptions for machinery and equipment used in renewable energy projects other than wind energy projects. The proposal also would severely curtail the exemptions for wind energy projects, allowing the exemption for only projects owned or used by local utilities, or projects of which the electricity is sold to local utilities.

Last year, the 2009 Legislature substantially revised the Washington sales and use tax exemptions applicable to the purchase of components and installation services that are used in projects that use wind power to generate electricity. See RCW 82.08.962; RCW 82.12.962. Pursuant to the 2009 law, for the period from July 1, 2009 through June 30, 2011, a 100% sales and use tax exemption is available. For the period from July 1, 2011 through June 30, 2013, a 75% sales and use tax exemption is available.

The 2010 Legislature proposes to eliminate those exemptions altogether for non-wind energy projects, including solar, biomass, geothermal and other projects. For wind energy projects, the exemptions would be available only if the project will be sold to or used by a local electric utility, or sold to or used by a person that sells the resulting electricity to a local electrical utility. The effective date of these proposed changes is not clear, but the amendments seem to be intended to apply starting July 1, 2010.

These amendments to RCW 82.08.962 and RCW 82.12.962 were first proposed in Senate Bill 6763 on January 25, 2010. Now, they have been incorporated into the Senate's omnibus tax bill, Senate Bill 6873, as sections 2501 and 2502. SB 6873 was first submitted to the Senate on February 24, 2010 and was the subject of public hearings on that same day.

The Commerce Clause of the United States Constitution (Art. I, § 8, cl. 3) forbids state taxes that discriminate against interstate commerce in favor of local commerce. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). As the Supreme Court explained: "Our Commerce Clause jurisprudence is not so rigid as to be controlled by the form by which a State erects barriers to commerce.… 'The commerce clause forbids discrimination, whether forthright or ingenious. In each case, it is our duty to determine whether the statute under attack, whatever its name may be, will in its practical operation work discrimination against interstate commerce.'" West Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 201 (1994) (quotingBest & Co. v. Maxwell, 311 U.S. 454, 455-56 (1940)). For this reason, the limitation on wind energy projects in the proposed legislation is likely unconstitutional.

Although the constitutional infirmity was pointed out to the Senate during February 24 Senate committee hearings, SB 6873 remains a live bill. Statements in the record indicated a concern with meeting the current budget deficit, even if the courts would later order tax refunds for all wind projects in the future.

If SB 6873 is enacted, affected taxpayers may wish to bring immediate lawsuits against the state, seeking restraining orders against collection of sales and use taxes with respect to wind energy projects. Although taxpayers are normally required to pay all contested taxes before seeking judicial relief, RCW 82.32.150 provides an exception for taxes that appear to be in violation of the United States Constitution.

If you have questions about this or other state tax-related issues, contact one of the following Stoel Rives tax attorneys:

Carl Lewis at (206) 386-7688 or cslewis@stoel.comRobert Manicke (503) 294-9664 or rtmanicke@stoel.comKevin Pearson at (503) 294-9622 or ktpearson@stoel.com
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